Life expectancy assumptions have fallen for the fourth year running, reflecting a decrease in the expected rates of future improvements in mortality, according to KPMG’s latest Pensions Accounting Survey.

KPMG’s Pensions Accounting Survey looks at trends in best-estimate assumptions based on 212 clients with UK Defined Benefit (DB) pension schemes reporting under IFRS, UK GAAP or US GAAP at 31 December 2018.

Median assumed life expectancies for current pensioners have reduced by 0.2 years (to 86.9 measured from age 65) whilst life expectancies for future pensioners have reduced by 0.1 years (to 88.4 measured from age 45) compared to last year’s survey. This has led to an improvement in company balance sheets.

The trend of falling assumed life expectancies is expected to continue following the recent publication of the Continuous Mortality Investigation (CMI) 2018 model. The latest model introduces a new parameter which allows companies to reflect differences between particular groups of the population (such as pension scheme members), and the general population data on which the model is calibrated.

Naz Peralta, Pensions Director at KPMG said: “Following the publication of CMI 2018, by the end of 2019 assumed life expectancies will be back to levels last seen in 2009. This ‘lost decade of life expectancy’ is largely due to the slowing rate of future mortality improvements as projected by the Continuous Mortality Investigation Bureau (CMIB) over the past four years.

“The initial addition parameter is the second new parameter added in recent years, the first being the smoothing parameter introduced with CMI 2016. Although these in theory allow companies to tailor their assumptions better, in practice it is likely to cause some confusion due to the complexity and subjectivity involved. We expect many companies will use the default assumptions for these new parameters until they are understood better.”

GMP equalisation
Historic industry estimates of the cost of equalising benefits for the effect of unequal GMPs ranged from 1% to 3% of total liabilities. However KPMG’s report shows that around 70% of companies have reported an impact of 1% or less as at December 2018.

Naz Peralta added: “The data shows that historic industry estimates of the cost of equalising GMPs were overstated. Unfortunately for some schemes the administration and cost of compliance will be almost as high as the cost of increasing benefits themselves.”